If you're feeling uneasy about your retirement plan, you're not alone. The past year was devastating to many people's retirement dreams. Just as consumers began to look past the disastrous terrorist attacks of 2001, Enron and other corporate scandals grabbed headlines. Stock values fell, and companies tightened their belts, sometimes at the expense of employee benefit programs. Previously reliable 401(k) plans suffered losses. Now that many of us are sadder but wiser, what's the right approach to help ensure a fulfilling retirement?
Retirement or Financial Planning?
In hindsight, many people feel they placed too much confidence in the stock market at a time when it seemed that almost any investment was a "can't-miss" proposition. But then, many people mistake investing for financial planning. Financial planning is actually the comprehensive process of meeting your life goals through proper management of your finances.
Life goals can include buying a home, saving for your child's education, planning for retirement or just about anything else that is important to people. Your goals may be unique. The important thing to remember is that each financial decision you make can affect other areas of your life. For example, an investment decision may have tax consequences that are harmful to your estate plans. Or a decision about funding your child's or your own education may affect when and how you meet your retirement goals.
Where to Start
Your goals will help determine how much income you'll need during retirement. You'll also want to take stock of your current finances. How much do you have in savings? How much have you invested in an IRA, 401(k) or pension plan? If you're eligible for Social Security benefits, you can get an estimate of what this income would be at retirement age by accessing the Social Security Administration Web site at www.ssa.gov. Assessing these potential income sources will help determine how much additional income you may need in retirement.
Start as Soon as You Can
People who save or invest small amounts of money early and often tend to do better than those who wait until later in life. Developing good financial planning habits such as saving, budgeting, investing and regularly reviewing your finances early in life will help you prepare to meet life changes and handle emergencies. It's never too late to save, and it's never too early.
Do it Yourself?
Some personal finance software packages, magazines and self-help books can help you do your own financial planning. You may decide to seek professional help if you're uncomfortable with finances or don't know where to start. If you decide to work with a professional, make sure you are getting comprehensive financial planning advice. The government does not regulate financial planners as financial planners; instead, it regulates planners only by the services they provide. For example, a planner who might also provide securities transactions or advice is regulated as a stockbroker or investment adviser. As a result of this, the term "financial planner" may at times be used inaccurately by some financial advisers. Whether or not you work with planning, following a ·
few tips, listed below, will help you avoid common mistakes.
Set measurable goals Set specific targets for what you want to achieve and when you want to achieve results. For example, instead of saying you want to be "comfortable" when you retire or that you want your children to attend "good" schools, quantify what comfortable and good mean so that you'll know when you've reached your goals.
Re-evaluate periodically Your financial goals may change over the years due to changes in your lifestyle or circumstances, such as an inheritance, marriage, birth, house purchase or change of job status. Revisit and revise your financial plan as time goes by to stay on track with your long-term goals.
Be realistic in your expectations Financial planning is a common-sense approach to managing your finances to reach your life goals. This life-long process cannot change your situation overnight. Remember that events beyond your control, such as inflation or changes in the stock market or interest rates, will affect your financial planning results.
Choosing a Financial Planner
Your friends and family members may provide useful recommendations, but ask questions and play an active role in making your decision. Ask about the financial planner's experience, qualifications and services. Does the planner take a comprehensive approach? Will he do most of the work on your financial plan or delegate to other professionals? How is the planner paid fees, commissions or both? More importantly, will the planner fully disclose all compensation resulting from recommendations made to you, whenever you ask? Does your planner have any conflicts of interest? Has the planner ever been publicly disciplined for unlawful or unethical behavior? Get everything you need in writing.
You're in Charge
Whether you decide to work with a professional or plan alone, be sure your financial plan addresses your entire financial situation and all your primary life goals. If you work with a professional, be sure you understand the financial planning process and what the planner should be doing. Provide the planner with all of the relevant information on your financial situation.
Rick Adkins, CFP, MBA, ChFC, CLU, is CEO of The Arkansas Financial Group Inc, in Little Rock and chairs the governing body of Certified Financial Planner Board of Standards Inc. For more information, please visit www.CFP.net.
